The primary reason why the balance of payments method is difficult to implement in determining exchange rates is that: A) the timeliness of trade flow data tends to affect the current account more dramatically than the capital account and thus gives rise to volatility in the foreign exchange markets. B) data on trade flow elasticity is difficult to obtain and the sensitivity of such trade flows to the movement of exchange rates is not determinable. C) foreign exchange markets affect trade flows and help determine the values of the balance of payments and not the other way around.


yeah out of those 3 I like B also. I’ll take swaptiongamma^2 please.

i would have guess A… but incorrectly guessed it sounds like

B – I guessed correctly…I need to go back and study this *&^%, especially after last year’s brutality they called BOP. The traditional approach to foreign exchange rate determination suggests that exchange rate adjustments are required to restore balance of payments equilibrium. This is a difficult model to implement, however. An analysis of these potential adjustments requires an estimate of trade flow elasticity in response to movements in exchange rates. Further, the model must be dynamic and complex enough to handle the impact of capital flows and the effect on the balance of payment components. Ultimately, small changes in current account flows cannot substantiate the dramatic points of inflection and volatility in the exchange rate markets, meaning an analysis of the elements of the balance of payments is not useful in explaining how exchange rates are determined.

I’ve completely drawn a blank here

I drew a blank too - after reading their ans… lol